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Union Of India v. Prafulla Kumar Sanyal .
Factual and Procedural Background
The Union of India invited tenders for construction of a bridge over the Imphal River in Manipur. The respondent’s tender was accepted on 20 February 1965, and a formal contract containing an arbitration clause (clause 29) was executed on 11 March 1965. Clause 29 provided that disputes were to be referred to a sole arbitrator to be appointed by the President of India for the Manipur Territory, or, if that person was unwilling to act, to another person appointed by the Administration.
When disputes arose, the respondent filed a petition under the Arbitration Act, 1940 in the Calcutta High Court seeking that the arbitration agreement be filed and an order of reference be made. A single judge of the High Court rejected the Union’s jurisdictional objection and, instead of directing the appointment procedure in clause 29, appointed Mr Tapash Banerjee, Advocate, as arbitrator. In a Letters Patent Appeal, the Union conceded jurisdiction but argued that only an arbitrator appointed in accordance with clause 29 could act. The Division Bench dismissed that contention, holding that no arbitrator had yet been appointed under the agreement and therefore the court could appoint one. The Union of India obtained special leave to appeal to the Supreme Court.
Legal Issues Presented
- Whether, under Section 20(4) of the Arbitration Act, 1940, a court is obliged to refer disputes to an arbitrator who has not yet been actually appointed but whose appointment is contemplated by a contractual clause providing an “adequate and exhaustive” appointment mechanism.
- Consequently, whether the Calcutta High Court was correct in appointing its own arbitrator instead of directing that the President of India make the appointment envisaged by clause 29.
Arguments of the Parties
Union of India (Appellant)
- Clause 29 constituted an exhaustive mechanism for appointment, including substitutional appointments; hence, for the purposes of Section 20(4), an arbitrator must be taken as “appointed,” and the court lacked authority to appoint anyone else.
- Relied on Union of India v. Himco (India) Pvt. Ltd., AIR 1965 Cal 404, and Dhanrajamal Govindram v. Shamji Kalidas & Co., AIR 1961 SC 1285, to contend that the court should merely forward the agreement for appointment rather than select an arbitrator itself.
Respondent
- Supported the High Court view that because no arbitrator had yet been appointed, the court was free under Section 20(4) to appoint one.
- In the Supreme Court, however, both parties expressed willingness for the President of India to make the appointment contemplated by clause 29.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Union of India v. Himco (India) Pvt. Ltd., AIR 1965 Cal 404 | An arbitration clause with complete machinery for appointment can suffice for a court to order reference even if the named arbitrator has not yet accepted. | Cited to illustrate the appellant’s contention; distinguished as not deciding whether Section 20(4) obliges referral where no actual appointment exists. |
| Dhanrajamal Govindram v. Shamji Kalidas & Co., AIR 1961 SC 1285 | Court may perform the ministerial act of sending the agreement to the person empowered by the contract to select an arbitrator. | Referenced to show that contractual mechanisms are to be respected, but the Court noted the case did not address the precise statutory interpretation in question. |
Court's Reasoning and Analysis
Justice P. S. Kailasam examined the text of Section 20(4) of the Arbitration Act, 1940, which directs a court to make “an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise,” and, only failing such appointment or consensus, to appoint an arbitrator itself.
- The phrase “arbitrator appointed by the parties” requires an actual appointment, not merely a contractual provision for future appointment. Because the President of India had not in fact appointed anyone, no arbitrator existed under the clause.
- Accordingly, the High Court was not statutorily bound to make a reference to a non-existent arbitrator. Nevertheless, before substituting its own choice, the court should consider the feasibility of effectuating the contractual procedure.
- The precedents relied on by the appellant did not squarely decide the statutory question; they dealt with circumstances where either an arbitrator had been selected or the court’s act was purely ministerial.
- Given that both parties now desired compliance with clause 29, the Supreme Court deemed it appropriate to give effect to the contractual mechanism.
Holding and Implications
Appeal Allowed. The Supreme Court directed the President of India to appoint an arbitrator under clause 29 within two months. If no appointment is made within that period, Mr Tapash Banerjee (earlier appointed by the High Court) will enter upon the reference. No order as to costs.
Implications: The ruling clarifies that Section 20(4) obliges a court to refer disputes only to an arbitrator who has been actually appointed by the parties; mere contractual machinery is insufficient. However, courts should, where practicable, honor the appointment mechanism agreed upon by the parties before exercising their own power to appoint. The decision harmonises party autonomy with judicial oversight but does not establish any broader precedent beyond interpretation of Section 20(4).
P.S Kailasam, J.— This appeal is preferred by special leave by the Union of India against the judgment and order of the Calcutta High Court dated July 31, 1968. The Union of India called for tenders for the construction of a bridge on Imphal River in the State of Manipur. The respondent submitted his tender and the tender was accepted by the appellant at Manipur on February 20, 1965. On March 11, 1965, a formal agreement was entered into in writing between the parties. On behalf of the President of India, the Executive Engineer, Hydro Electric & Bridges Project Division, executed the agreement. The deed of agreement contained an arbitration clause which provided that “except where otherwise provided in the contract, all questions and disputes arising out of or relating to the contract shall be referred to the sole arbitration of the person appointed by the President of India with such designation only as he may specify for Manipur Territory and if he is unwilling to act, to the sole arbitration of some other person appointed by the arbitration”.
2. A dispute arose between the parties and the respondent filed a suit against the Union of India in the High Court of Calcutta under the Arbitration Act and prayed that the arbitration agreement dated March 1, 1965 be filed and that an order of reference be made to the arbitrator under the terms of the said agreement. Before the Single Judge who took the matter at the first instance, the application was resisted on the ground that no part of the cause of action had arisen within the jurisdiction of the Calcutta High Court. Learned Single Judge rejected this contention on behalf of the appellant herein holding that the averments made in paras 13 to 15 and paras 18 to 21 showed that parts of cause of action had arisen within the jurisdiction of the Court and the Court had jurisdiction to try any suit in respect of the said subject-matter if such suit had been filed in the Calcutta High Court. In this view, the court rejected the objection filed by the Union of India and appointed Mr Tapash Banerjee, a member of the Bar, as the arbitrator. Against the judgment, the Union of India preferred a Letters Patent Appeal. In the Letters Patent Appeal, the Union of India did not impeach the conclusion and finding of the learned Judge that the Court had jurisdiction to deal with the matter. But, it was submitted on behalf on the Union of India that clause 29 of the agreement provided that any matter of dispute shall be referred to the sole arbitration of the person appointed by the President of India (with such designation only as he may specify for Manipur Territory) or if he is unwilling to act to the sole arbitrator some other person appointed by the arbitrator. An arbitrator can be appointed only under the terms of the agreement. The High Court rejected this contention on the ground that the arbitration agreement does not mention any appointed arbitrator. The arbitration agreement states that an arbitrator has to be appointed by the President of India or if he is unwilling to act to the sole arbitration, some other person has to be appointed by the Administration. The High Court in appeal held that it was manifest that there was no arbitrator appointed in the agreement.
3. Under Section 20(4) of the Arbitration Act when an agreement is filed, the court is required to make an order of reference to the arbitrator appointed by the parties, whether in the agreement or otherwise, or where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the court. The sub-section requires that the court shall make an order of reference to the arbitrator appointed by the parties whether in the agreement or otherwise. If no such arbitrator had been appointed and when the parties cannot agree upon an arbitrator, the court may proceed to appoint an arbitrator by itself. Thus if an arbitrator had been appointed whether in the agreement or otherwise, the court shall make an order of reference to him. In this case, clause 29 of the agreement provides that every dispute shall be referred to the sole arbitration of the person appointed by the President of India or if he is unwilling to act to the person appointed by the arbitrator. An arbitrator, in fact, has not been appointed by the President though the provision has been made for such appointment. Construing strictly the words of sub-section (4), the court is not bound to make an order of reference to the person that is to be appointed by the President of India or in the event of his not willing to a person to be appointed by the Administration, for the arbitrator has not been appointed as contemplated in the sub-section. Therefore, it will not be obligatory on the part of the court to make an order of reference to the arbitrator that may be appointed by the President. If an arbitrator had not been appointed as required in the sub-section, the court is to find whether the parties could agree upon an arbitrator. If the parties agree, the court has to appoint the person agreed to as an arbitrator. If there is no such agreement, the court will have to appoint an arbitrator of its choice.
4. It was contended on behalf of the appellant that when the arbitration agreement contains adequate and exhaustive machinery for appointment of arbitrators including substitutional appointments in case the appointed arbitrator refuses to act, it must be construed as the arbitrator having been appointed under sub-section (4) to Section 20. In support of this contention a decision of Calcutta High Court in Union of India v. HIMCO (India) Pvt. Ltd AIR 1965 Cal 404 was relied on, wherein Bachawat, J., observed that the arbitration agreement contained adequate and exhaustive machinery for appointment of arbitrators including substitutional appointments in case the appointed arbitrator refuses to act. The learned Judge observed the fact that the appointed arbitrator has not yet signified his willingness to act as arbitrator does not debar the court from making an order of reference of the dispute to him. If he subsequently refuses to act as the arbitrator the procedure laid down in the arbitration agreement will prevail and will have to be followed. In support of this view the learned Judge relied on the decision of this Court in Dhanrajamal Govindram v. Shamji Kalidas and Co. AIR 1961 SC 1285. This Court referring to the powers of the Court under Section 20(4) to appoint an arbitrator observed that it was perfectly possible (in the case) if the parties appointed the arbitrator or arbitrators. If the parties do not agree, the court may be required to make a decision as to who should be selected as an arbitrator. The Court further observed that in the case before it the parties by their agreement have placed the power of selecting an arbitrator or arbitrators in the hands of Chairman of the Board of Directors, and the court can certainly perform the ministerial act of sending the agreement to him to be dealt with by him. The decisions do not consider the question whether under Section 20(4) the court is bound to appoint an arbitrator who has actually not been appointed but for whose appointment adequate and exhaustive machinery has been provided. Taking into account the wording of the sub-section that the court shall make an order of reference to the arbitrator appointed by the parties we do not feel that the sub-section requires the court to appoint an arbitrator who had not actually been appointed, but for whose appointment adequate provisions have been made.
5. In the instant case, as an arbitrator has not been appointed by the parties and as the parties are not agreed upon an arbitrator the court may proceed to appoint an arbitrator, but in so doing it is desirable that the court should consider the feasibility of appointing an arbitrator according to the terms of the contract. In this case the respondent in his petition has prayed for an appointment of an arbitrator under the terms of the agreement. Before us both the parties expressed a desire that the President should be asked to appoint an arbitrator according to clause 29 of the agreement. We feel that there could be no objection to this suggestion and we accordingly ask the President to appoint an arbitrator as contemplated under clause 29 within two months from today. The arbitrator so appointed will immediately enter on his duties and dispose of the reference as expeditiously as possible. The appeal is accordingly allowed. The President will appoint the arbitrator within two months from today, failing which Mr Tapash Banerjee who was appointed as an arbitrator by the Single Judge of the Calcutta High Court will enter upon his duties. In the circumstances of the case, there will be no order as to costs.
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